2025 (2) TMI 32 - AT - Income Tax

Assessee must include full consideration in capital gains despite loan adjustments, Section 54F allows deduction on net investment

Kothari Sanjay Manilal, HUF Versus The DCIT Circle 3 (1) (1), Ahmedabad

Kothari Sanjay Manilal, HUF Versus The DCIT Circle 3 (1) (1), Ahmedabad - TMI ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in this judgment include:Whether the delay in filing the appeal by the assessee should be condoned.The correctness of the sale consideration determined by the Assessing Officer (AO) for the relinquishment of rights in land by the assessee.Eligibility of the assessee for deduction under Section 54F of the Income Tax Act, 1961.The appropriateness of the disallowance of interest expenses claimed under Section 57 of the Act.ISSUE-WISE DETAILED ANALYSIS1. Delay in Filing the AppealThe Tribunal considered the explanation provided by the assessee regarding the delay in filing the appeal. The delay was attributed to the order being sent to an email ID belonging to the assessee's nephew, which was not communicated to the assessee. The Tribunal found the explanation satisfactory and condoned the delay.2. Determination of Sale Consideration for Relinquishment of Rights in LandThe legal framework involved the computation of capital gains under the Income Tax Act. The AO had determined the sale consideration based on the rate at which the land was sold by the societies to a third party, Cloud 9 Infraspace LLP. The assessee argued that the consideration should be based on the actual amount received from the societies, which was lower than the AO's determination.The Tribunal noted that the assessee was not a party to the sale deed executed by the societies and that the consideration for relinquishment should be based on the actual amount received. The Tribunal found that the AO had not verified the actual consideration received by the assessee and directed the AO to consider the amount as per the resolutions passed by the societies, which amounted to Rs. 10,85,28,620/-. The Tribunal partly allowed the assessee's ground on this issue.3. Deduction under Section 54FThe relevant legal framework involved the conditions for claiming deduction under Section 54F, which requires the completion of construction within three years from the date of transfer of the original asset. The AO disallowed the deduction on the grounds that the construction was not completed within the stipulated period.The Tribunal referred to precedents, including decisions from the Karnataka High Court and the Tribunal itself, which held that if the entire consideration is invested in the construction of a residential house within the stipulated period, the deduction should be allowed irrespective of the completion status. The Tribunal directed the AO to verify the correctness of the deduction claimed and partly allowed the assessee's ground.4. Disallowance of Interest Expenses under Section 57The legal framework involved the deduction of expenses under Section 57, which requires that the expenditure be laid out wholly and exclusively for earning income. The AO disallowed a portion of the interest expenses as the entire borrowed fund was not utilized for earning income.The Tribunal found that the AO had incorrectly based the disallowance on the opening balance of the loan without considering repayments made during the year. The Tribunal directed the AO to rework the disallowance by considering the closing balance of the loan and the funds utilized for earning interest income. The Tribunal partly allowed the assessee's ground for statistical purposes.SIGNIFICANT HOLDINGSThe Tribunal condoned the delay in filing the appeal, emphasizing the importance of considering genuine explanations for procedural delays. It established that the determination of sale consideration for capital gains should reflect the actual transaction value received by the taxpayer, not the value realized in subsequent transactions by third parties. The Tribunal reinforced the principle that investment in a new residential property within the stipulated period qualifies for Section 54F deduction, even if construction is delayed. It clarified that interest expenses under Section 57 must be directly linked to income generation, with a focus on actual fund utilization.The appeal was partly allowed, with directions for the AO to reassess certain calculations based on the Tribunal's findings.